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Re: Comments on Proposed Rules Relating to the Definition of the Term “Fiduciary” 

Under the Employee Retirement Income Security Act 

29 CFR Part 2510 

RIN 1210-AB32 

February 3, 2011 

VIA E-MAIL: e-ORI@dol.gov 

Office of Regulations and Interpretations 

Employee Benefits Security Administration 

Room N-5655 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, DC 20210 

Ladies and Gentlemen: 

We are submitting this letter in response to the solicitation by the Department of Labor (the 

“Department”) for comments on the proposed rule under the Employee Retirement Income Security Act 

(“ERISA”), which defines the circumstances under which a person is considered to be a “fiduciary” by 

reason of providing “investment advice” to an employee benefit plan or a plan’s participants (the 

“Proposed Rule”). 

We are a sponsor and contributor with respect to several ERISA plans covering our firm’s 

employees. In addition, our clients include parties who serve in various roles with respect to employee 

benefit plans, including plan sponsors, plan investment committees, plan administrators, plan service 

providers and plan counterparties. However, the views expressed in this letter are our own and do not 

necessarily reflect the views of any particular client of our firm. 

In designing ERISA, Congress forged a delicate balance between protecting benefit plans and 

ensuring a healthy market for the services required to operate and administer those plans. Over the years 

the Department has been unflagging in its efforts to ensure that its rulemaking and enforcement under 

ERISA continue to support this balance. It is clear that the Department’s aim with the Proposed Rule is to 

adjust a perceived shift in this balance which the Department believes has left plans and plan participants 

unduly exposed to risks and harm. We commend the Department’s efforts, but we believe that the 

Proposed Rule would ultimately impair the balance intended under ERISA and have a significant negative 

impact on both plans and plan service providers. Accordingly, we urge the Department to reconsider its 

adoption of the Proposed Rule. 
Department of Labor February 3, 2011 pg. 2 

Davis Polk & Wardwell LLP 

The preamble to the Proposed Rule (the “Preamble”) states that the Proposed Rule is intended, in 

part, to codify certain well accepted interpretations under existing authorities, such as the inclusion as 

fiduciaries under ERISA of: 

• any party who acknowledges that it is acting as a fiduciary within the meaning of ERISA; 

• any party acting as a manager-of-managers in the traditional sense with respect to plan 

assets; and 

• any party providing investment advice with respect to plan assets in the traditional sense, 

whether to a plan or a plan participant or beneficiary. 

We support these aspects of the Proposed Rule. 

The Preamble also makes clear the Department’s aim to ensure that parties who hold themselves 

out as general pension consultants or appraisers with respect to transactions involving Employee Stock 

Ownership Plans (“ESOPs”) act in a prudent, expert and unbiased fashion, with full disclosure of any 

potential conflicts of interest. We support this objective as well. 

However, we believe that the foregoing objectives are best achieved through guidance that is 

tailored to these objectives, rather than by an overhaul of the existing investment advice rules under 

ERISA. 

This letter is divided into five parts. Part I summarizes the changes included in the Proposed Rule 

and the practical impact of these changes. 

Part II provides a more detailed analysis of the concerns raised by the Proposed Rule. Again, while 

the Department clearly intends the Proposed Rule to strike a more positive alignment of the regulatory 

priorities under ERISA, we believe that the Proposed Rule will have the opposite effect. As described in 

Part II we believe that the Proposed Rule would: 

• be inconsistent with the legislative intent of ERISA and would upset the 

long-standing balance between plan protection and a robust market for 

necessary plan services; 

• inappropriately create a definition of investment advice under ERISA that 

is broader than the definition applicable under the Investment Advisers Act 

of 1940 (the “Advisers Act”); 

• impose an excessive duty and burden on courts to develop standards for 

determining when a party has acted as a fiduciary under ERISA, without 

appropriate regulatory guidelines; 

• potentially classify as ERISA fiduciaries parties who act in roles never 

intended to confer ERISA fiduciary status; and 

• create significant confusion and uncertainty at a time when other critical 

legislative and regulatory priorities are being implemented. 

Part III focuses specifically on the exception under the Proposed Rule for advice rendered by 

parties engaging in sales or purchases with plans. This exception is essential if the Proposed Rule is 

adopted in its current form, and the exception would be welcomed by many plan service providers and 
Department of Labor February 3, 2011 pg. 3 

Davis Polk & Wardwell LLP 

counterparties. However, we believe the inclusion of this exception in the Proposed Rule is an indication 

that the core provisions of the Proposed Rule are overbroad. 

Part IV offers suggestions as to how the Department might better address the concerns which it 

has identified as the basis for its revision of the current rule. 

Part V summarizes some of the critical changes that would be necessary if the Department 

decides to move forward with the Proposed Rule in spite of the concerns expressed in this and other 

comments that have been submitted to the Department. 

Part I: Summary of the Existing Rule, the Proposed Rule and the General Implications of 

the Change

ERISA imposes exacting standards of conduct and strict self-dealing prohibitions on any party 

acting as a fiduciary with respect to an ERISA-covered benefit plan. These duties are widely regarded as 

the highest standards of prudence and loyalty known to law. ERISA identifies as fiduciaries to a plan any 

party who administers the plan, any party who exercises discretion with respect to the plan’s assets and 

any party who provides investment advice to the plan. Under the current ERISA regulations (the “Current 

Rule”), a person is deemed to provide investment advice for these purposes if that person: (1) renders 

advice as to the purchase, sale or value of securities or other property, (2) on a regular basis, (3) pursuant 

to a mutual agreement, arrangement or understanding, written or otherwise, between such person and the 

plan or a plan fiduciary, that the advice will (4) serve as a primary basis for investment decisions with 

respect to plan assets, and (5) be individualized to the particular needs of the plan (the “Five-Part Test”). 

The Proposed Rule would dispense with this Five-Part Test and provide, in pertinent part and with 

certain exceptions, that a person will be deemed to provide investment advice if that person: 

• provides advice or an appraisal or fairness opinion concerning the value of securities or 

other property or makes recommendations as to the advisability of investing in, purchasing, 

holding or selling securities or other property, or provides advice or makes 

recommendations as to the management of securities or other property; and 

• is an investment adviser within the meaning of the Advisers Act or otherwise provides 

advice or makes recommendations described above pursuant to an understanding that 

such advice may be considered in connection with making investment or management 

decisions with respect to plan assets, and will be individualized to the needs of the plan, a 

plan fiduciary, or a participant or beneficiary. 

As noted, the Preamble to the Proposed Rule indicates that the Department’s primary objective in 

eliminating the Five-Part Test is to aid its enforcement initiatives, particularly its initiatives against parties 

providing allegedly flawed stock valuations in the context of certain ESOP transactions and its initiative 

under its Consultant/Adviser Project (“CAP”), which seeks to identify potential conflicts tainting pension 

consultants who assist in the selection of investment funds for plans while providing other services to these 

plans. The Proposed Rule would undoubtedly improve the ability of the Department and the plaintiff bar to 

bring actions against plan service providers, but it seems to shift the scale too far. By eliminating the 

“regular basis,” “mutual understanding” and “primary basis” elements from the definition of investment 

advice, the Proposed Rule would create an almost insurmountable presumption of an investment advisory 

relationship where such a relationship may not have been intended by any party. When coupled with the 

addition of “recommendations as to the management of assets” as investment advice, this would convert a 

broad range of typical communications between plans and their service providers into per se investment 

advice and give private plaintiffs unfettered recourse to hold plan service providers responsible for 

unforeseen investment outcomes, regardless of whether the plan service providers actually participated in 

the plan’s decision making in any meaningful way. 
Department of Labor February 3, 2011 pg. 4 

Davis Polk & Wardwell LLP 

The Preamble also argues that repeal of the Five-Part Test is appropriate in light of the evolution 

from defined benefit to defined contribution plans. However, the Five-Part Test is more critical and more 

beneficial to defined contribution plans than it ever was to defined benefit plans, as defined contribution 

plan sponsors and participants are more likely to be individuals with limited knowledge of the fundamental 

aspects of plans and plan accounts and in greater need of non-advisory assistance than pension plan 

administrators. The protection currently afforded to service providers under the Five-Part Test allows plans 

and participants who chose less costly non-advisory services to nonetheless get a minimal level of 

information and assistance from service providers. In our experience these services are invaluable to 

plans and plan participants, and service providers are typically careful to provide only the appropriate type 

and level of assistance with all appropriate disclosures. 

The Preamble states that the Proposed Rule is “designed to protect participants from conflicts of 

interest and self-dealing by giving a broader and clearer understanding of when persons providing such 

advice are subject to ERISA’s fiduciary standards.” As noted in Part II of this letter, clarity was certainly a 

critical element of the legislative intent when ERISA was enacted. However, we believe that the Five-Part 

Test under the existing rule offers far more clarity for plans and service providers by testing whether an 

advisory relationship exists based on the actual understanding and course of conduct between the plan 

representative and the service provider, focusing on the legitimate presumption and expectation of the plan 

representative. 

Service providers who are deemed to be providing advice as fiduciaries to plans are required to 

undertake an extensive analysis of the plan’s needs and objectives and possess the highest level of 

expertise in the fiduciary matters at hand. Fiduciaries are subject to liability if they are found in hindsight to 

have failed to meet these standards. These are appropriate standards in the context of a fiduciary advisory 

relationship, but these standards have not been deemed necessary or appropriate in service relationships 

that do not involve investment advice in the common, traditional sense under ERISA. The added 

responsibility and potential liability that would be imposed on service providers under the Proposed Rule 

would have a significant negative impact on both service providers and plans. The Proposed Rule would 

impose unwarranted expectations and exposure for service providers and harm plans by stifling critical 

non-advisory services and driving up the cost of these services, particularly affecting Individual Retirement 

Accounts (“IRAs”) and smaller plans that have less leverage with service providers than larger plans and 

are less able to pay the fees required for added services. 

In support of the Proposed Rule, the Department refers to evidence of abuse detected in its ESOP 

and CAP initiatives and reports prepared by the Government Accountability Office (“GAO”) and Securities 

and Exchange Commission (“SEC”). The Department also refers to the benefits that it believes would be 

realized by plans under the Proposed Rule, including improved service values. Finally, the Department 

offers estimates of the costs that plan service providers would incur in complying with the Proposed Rule. 

The Department acknowledges that its assessment of these factors is uncertain. While we recognize that 

these factors are difficult to measure, based on our experience with plans we believe that the Department’s 

assumptions as to the existence of service provider abuse and the improved service value that could be 

achieved under the Proposed Rule are overstated and the Department’s estimate of the costs that would 

be imposed on service providers by the Proposed Rule are understated. In this respect, we concur in 

many of the observations included in the January 11, 2011 comment letter submitted to the Department by 

the firm of Whitaker, Chalk, Swindle & Sawyer L.L.P. on behalf of the Securities Committee of the Business 

Law Section of the State Bar of Texas, which raises a number of questions concerning the Department’s 

analysis. We encourage the Department to reassess these factors, as we believe that the cost/benefit 

analysis in this case is critical given the fundamental changes which the Proposed Rule seeks to impose. 

While the Proposed Rule may promote the Department’s enforcement in discrete cases, we 

believe that from a policy perspective the larger adverse impact on plans and the plan service market, 

particularly for smaller plans, would far outweigh the enforcement benefits. We recognize the 

Department’s desire to improve its enforcement leverage under its ESOP and CAP initiatives. However, 
Department of Labor February 3, 2011 pg. 5 

Davis Polk & Wardwell LLP 

we do not believe that these situations are appropriately remedied by a broad, draconian rule that would 

arbitrarily put other service providers at risk in a business community where the overwhelming majority of 

service providers have diligently tried to operate in a way that draws a clear line for plans between advisory 

and non-advisory services, consistent with years of authority. Instead, the Department should create 

specific rules that address ESOP and plan consultant situations. To the extent that the Department has 

identified other situations that have escaped existing legal remedies under ERISA and other laws, we 

would suggest further analysis of these situations and a more probing assessment of the costs and 

benefits of attempting to address these situations with a broad overhaul of the current fiduciary rules. 

While the foregoing summarizes our general concerns, the Proposed Rule raises a number of 

more fundamental legal and practical concerns, which are addressed below in the remainder of this letter. 

Part II: Detailed Analysis of the Legal and Practical Concerns Raised by

the Proposed Rule

A. The Proposed Rule is inconsistent with the legislative intent and design of 

ERISA, which balances appropriate plan protections against fair limitations on 

the duties of non-fiduciary service providers

In the Preamble to the Proposed Rule the Department states that it does not believe that the FivePart Test under the Current Rule is compelled by the statutory language of ERISA. Nor does it believe the 

current framework represents the most effective means of distinguishing persons who should be held 

accountable as fiduciaries from those who should not. We believe that the Five-Part Test is critical to the 

balanced objectives that Congress intended to achieve under ERISA. 

1. Legislative and regulatory background. The enactment of ERISA was intended to provide 

protection for both plan participants and service providers. Plan participants were often inexperienced 

investors and in need of greater protection than the then-existing laws gave them.1

 Service providers were 

in need of a clearer and more uniform approach to fiduciary liability than the state-by-state approach under 

trust law. The uniformity created by ERISA was intended to “help administrators, fiduciaries and 

participants to predict the legality of proposed actions without the necessity of reference to varying state 

laws.” 2

 In constructing the provisions of ERISA, Congress distinguished between non-fiduciary service 

providers and plan fiduciaries, with the former being subject to prohibited transaction rules and the latter 

being subject to the highest prudence and loyalty standards known to law. Congress understood the 

magnitude of the standards it was imposing on fiduciaries under ERISA, and it intended to impose these 

standards only where the circumstances required them. To this end, Congress exempted from the 

definition of fiduciary all consultants and advisers to plans, other than investment advisers, unless their 

“special expertise” rendered them able to meet the high standards imposed and effectively provide advice 

with respect to the management or administration of plan assets.3

 

Ultimately, ERISA was drafted to include three separate categories of actors who are regarded as 

fiduciaries. Section 3(21)(A)(i) includes actors who exercise discretion with respect to plan assets. Section 

3(21)(A)(ii) includes those who provide investment advice to a plan. Section 3(21)(A)(iii) includes those 

who have discretion with respect to plan administration. The exercise of discretion with respect to the 

assets or administration of a plan are core fiduciary functions under any reasonable view. This strongly 

suggests that when Congress added investment advice to the list of fiduciary acts it had in mind acts of a 

clear and similarly substantial nature. To give a broad interpretation to the provision of investment advice 

would render Sections 3(21)(A)(i) and (iii) somewhat redundant, as Section 3(21)(A)(ii) would by definition 

 1

 S. REP. NO. 93-127, at 29 (1973); H.R. REP. NO. 93-533, at 12 (1973). 

2

 Id. 

3

 H.R. REP. NO. 93-1280, at 323 (1974) (Conf. Rep.). 
Department of Labor February 3, 2011 pg. 6 

Davis Polk & Wardwell LLP 

impose fiduciary responsibility on any person with discretionary authority or control over the management 

of the plan or its assets or over the administration of the plan – a result that Congress would surely not 

have intended. Instead, Congress intended Section 3(21)(A)(ii) to include as fiduciaries only those parties 

who clearly provided investment advice that is understood and intended to be fundamental to a plan’s 

investment decisions. 

The Five-Part Test under the Department’s Current Rule reflects this legislative preference for a 

clear and circumscribed definition of investment advice by providing that a party will only be deemed to 

provide investment advice if the party offers advice or recommendations as to the purchase, sale, or value 

of property on a regular basis pursuant to a mutual understanding that the advice will serve as a primary 

basis for the plan’s investment decisions. 

2. Proposed Rule. 

(a) General description of the Proposed Rule. The Proposed Rule provides, in relevant part, that 

a party will be deemed to provide investment advice if the party offers advice or recommendations as to the 

purchase, sale, or value of property or the management of plan property and that party (A) is an investment 

adviser within the meaning of the Advisers Act, (B) is a fiduciary with respect to the plan by reason of 

exercising discretion with respect to plan investments or serving as an administrator of the Plan, or (C)

provides the advice or recommendations pursuant to an understanding that such advice may be 

considered in connection with making investment or management decisions with respect to plan assets 

and will be individualized to the needs of the plan or a plan participant. 

The provisions of prongs (A) and (B) above seem to imply that a party will be a fiduciary with 

respect to a plan investment decision even if the party’s communications with plan representatives 

regarding that decision are provided in a context that makes clear that the communications were not 

intended as investment advice in any traditional sense. However, the precise intent of these prongs is not 

entirely clear. For example, it is not clear whether the reference in prong (A) to investment advisers under 

the Advisers Act is intended to mean that a party will be an ERISA fiduciary with respect to an investment 

decision by a plan if the party is an investment adviser under the Advisers Act (1) with respect to that 

specific investment decision, (2) with respect to investments of the plan generally or (3) with respect to its 

other customers generally. 

In any case, we believe that a party should be viewed as an investment adviser and fiduciary with 

respect to an investment decision only if the party provides investment advice in the traditional ERISA 

sense with respect to that particular investment decision, not by reference to the party’s identity or role in 

other contexts. 

At a minimum the Advisers Act prong of the Proposed Rule would dispense with the Five-Part Test 

and determine a party’s fiduciary status under ERISA by reference to the rules of the Advisers Act. In Part 

II.B. below we explain why this amalgamation of the ERISA and Advisers Act rules is problematic. 

Even if the Proposed Rule is modified to delete the Advisers Act prong, the remainder of the 

Proposed Rule would still eliminate the “regular basis,” “mutual understanding” and “primary basis” 

elements of the Five-Part Test. In addition, the Proposed Rule would add recommendations as to the 

management of assets to the list of activities that could constitute advice. These changes would have the 

sweeping effect of classifying as ERISA fiduciaries a variety of actors who were never intended to be 

treated as fiduciaries under ERISA. This is precisely what the Five-Part Test was intended to avoid. The 

Five-Part Test represents a 35-year-old regime supported by a wide body of judicial and administrative 

authorities, all focused on establishing a clear and balanced demarcation between fiduciaries and nonfiduciary service providers, as originally intended by ERISA. Each element of the Five-Part Test is 

essential to this purpose. 
Department of Labor February 3, 2011 pg. 7 

Davis Polk & Wardwell LLP 

(b) Addition of “recommendations as to the management of assets” to the definition of investment 

advice. The elimination of the “mutual understanding” and “primary basis” elements, when coupled with 

the addition of “recommendations as to the management of assets” to the definition of investment advice 

would cause the investment advice standards to be applied to a broad range of communications that do 

not directly relate to plan investments activity. As described in Part II.D. below this aspect of the Proposed 

Rule could potentially classify as investment advice many typical communications between plan sponsors 

and their lawyers, accountants and actuaries. 

The Preamble of the Proposed Rule states that the addition of the reference to the management 

of assets was intended to make clear that investment advice includes actions such as providing 

recommendations as to the voting of proxies on plan shareholdings and the selection of plan asset 

managers. As discussed in Part II.D., the reference to proxy voting recommendations may be overbroad. 

However, the provision of advice with respect to the selection and monitoring of specific investment 

managers in a typical “manager of managers” context has always been understood in the ERISA 

community to constitute investment advice for purposes of ERISA. But, rather than adding clarity on these 

points, the Proposed Rule muddies a line that is presently clear and well drawn. 

(c) Elimination of the “mutual understanding” and “primary basis” requirements. The Current Rule 

provides that a recommendation is not investment advice unless it is provided pursuant to a mutual 

understanding that it will be a primary basis for an investment decision. The Proposed Rule would 

eliminate the primary basis and mutual understanding elements. In the Preamble to the Proposed Rule the 

Department lumps the mutual understanding and primary basis elements together and argues that ERISA 

does not compel conditioning fiduciary status on a requirement that an adviser and a plan have a mutual 

understanding as to the primacy of the advice given, in relation to other advice and information that the 

plan may have considered in making its investment decision. 

The primary basis and mutual understanding elements are, in fact, related but separate elements 

of the Five-Part Test. 

The “primary basis” element focuses on the degree to which a communication was relied upon by 

the recipient to determine whether the communication was given, received and used as investment advice. 

This analysis ensures that only communications that were considered significant enough to actually be 

relied upon by the plan are sufficient to result in the imposition of fiduciary duties. Plan representatives 

frequently converse with their service providers regarding various aspects of the plan, and the primary 

basis requirement allows these conversations to take place without necessarily causing the service 

provider to become an investment adviser and fiduciary and to allow plan representatives to access 

alternative opinions without the requirement of a formal investment advisory relationship. For example, 

where an unsophisticated sponsor of a self-employed plan has decided, based on personal research and 

consultation with a more sophisticated acquaintance, to invest a portion of the plan’s assets in U.S. large 

cap equities, a service provider with no conflicting interest should not become a fiduciary when it suggests 

to the plan sponsor that there may be cost and diversification benefits in purchasing shares of an index 

fund rather than buying and selling individual stocks. 

The “mutual understanding” element of the Five-Part Test is equally critical to the clear delineation 

of fiduciary status intended by ERISA. In many typical situations, even where a particular communication 

is a primary basis for a core investment decision, there is no expectation among the parties that this 

communication would be regarded as investment advice. For example, assume that a mid-sized retail 

company sponsors a frozen defined benefit plan managed by an investment committee which includes the 

company’s Chief Financial Officer and other financial executives of the company. Rather than appointing 

an array of asset managers, the committee has determined that the plan should be invested primarily in a 

portfolio of institutional index funds. The committee retains a broker to expedite its investment plan and 

rebalance the portfolio periodically, but does not request or receive any investment advice from the broker 

in the ordinary sense. However, the committee asks the broker’s opinion regarding the fees charged by 

index funds that are structured as mutual funds and bank collective investment trust funds. The broker 
Department of Labor February 3, 2011 pg. 8 

Davis Polk & Wardwell LLP 

 

conducts some research on various mutual funds and collective trusts with respect to which the broker and 

his firm have no conflicting interest, and the broker reports back to the committee with a list of funds and 

their fees and general expense history. The committee ultimately chooses a portfolio of funds, including 

certain of the collective investment funds, indicated on the broker’s list. Later, the plan experiences lagging 

returns in some of these collective investment funds, not as a result of fees and expenses, but because the 

lower fee funds chosen by the committee had engaged in stock lending to a greater extent than the higher 

fee mutual funds and had experienced problems with this stock lending activity. 

The broker had merely responded to the committee’s request for fee information. Although the fee 

information was individually tailored to the plan’s request and was a primary consideration in some of the 

committee’s fund selections, there was no understanding that the broker’s limited assistance was intended 

to create an investment advisory relationship. Had the broker understood himself to be an investment 

adviser to the plan, he might have refused to respond to the committee’s request for fee information or he 

might have insisted on gathering additional information from the committee to ascertain the committee’s 

knowledge and experience with respect to the differences in how various funds managed their trading 

activity. The broker might have monitored the funds selected by the plan committee and might have been 

more alert to signs of emerging difficulties in certain stock lending relationships. 

In scenarios like the one above, the “mutual understanding” element of the Five-Part Test gives 

the parties, the Department and the courts a clear basis for determining whether an investment advisory 

relationship existed by specifically looking to the mutual understanding of the parties. The Proposed Rule 

would eliminate the “mutual understanding” element but would still require an “agreement, arrangement or 

understanding, written or otherwise” that the advice provided will be individualized and may be considered 

in connection with an investment or management decision. This wording suggests a requirement for 

mutuality. However, this could be subject to question merely by virtue of the fact that the Department 

determined that the word “mutual” should be deleted under the Proposed Rule. In any case, it is important 

to retain intact the original requirement for a “mutual understanding,” as this wording enhances the clarity 

of the rule, which is, again, consistent with the original intent of ERISA. 

(d) Elimination of the “regular basis” element. The Proposed Rule would also eliminate the 

“regular basis” element of Five-Part Test. Perhaps the most important function of the “regular basis” 

element of the Five-Part Test is its relation to the “mutual understanding” and “primary basis” elements. 

The frequency of a particular type of assistance is often critical to the analysis of whether there is a mutual 

understanding that the assistance would serve as a principal basis for the recipient’s decision making. 

This element allows courts to look to the frequency of communications to assist them in determining 

whether an advisory relationship exists. At the same time, courts can exercise their own judgment as to 

the required frequency under the prevailing facts and circumstances. In one case a court found that in the 

absence of any other indication of a “mutual understanding” the provision of assistance by a service 

provider on two occasions was not sufficient to characterize the assistance as investment advice.4

 In 

another case, a court found under the applicable facts that annual meetings over a five-year period were 

sufficient to show that investment advice was regularly offered.5

 

The “regular basis” test, together with the other elements of the Five-Part Test, makes it possible 

for bankers and brokers to have ordinary conversations with their customers and respond to basic, discrete 

customer inquiries, such as: 

• the banker or broker’s view on whether it is preferable to contribute a savings amount to a 

retirement plan or a non-retirement account; 

• the banker or broker’s view on whether it is preferable to repay a plan loan rapidly or slowly; 

4

 Brown v. Roth, 729 F. Supp. 391, 397 (D.N.J. 1990). 

5

 Daniels v. National Employee Benefit Servs., 858 F. Supp. 684, 691 (N.D. Ohio 1994). 
Department of Labor February 3, 2011 pg. 9 

Davis Polk & Wardwell LLP 

• the banker or broker’s general views of the costs and benefits of the fee structures of two 

competing third-party mutual funds (load vs. no-load) in which the banker or broker has no 

conflicting interest; or 

• the banker or broker’s general view of two alternative web-based retirement planning tools 

in which the banker or broker has no conflict. 

For example, if a customer maintaining an IRA or a small plan at a bank asks the bank for a 

referral of another type of non-manager service provider for a plan-related matter, it is not unusual for the 

bank to provide a list of several referrals in a manner that makes clear that the bank is merely offering 

requested information and is not advising the plan on its selection. 

This same approach might apply even where a customer requests assistance in identifying an 

investment. Assume that a customer establishes a small plan with a bank and, after researching mutual 

funds and exchange-traded funds, decides to invest a portion of the plan in an S&P or Russell index fund. 

In response to the customer’s request, the relationship banker provides the customer with a list compiled 

by the banker of S&P or Russell index funds with a trailing 5-year expense ratio below 0.15% as to which 

the banker has no conflict. 

Certainly, if the responsible relationship banker in the cases above became aware of a reason to 

update the information provided to the customer, the banker would do so. However, under the existing 

fiduciary rules, because the bank did not undertake to provide this assistance on a regular basis, the bank 

is not necessarily under a duty to monitor the choice of the plan representative. The plan representative 

has not agreed to pay for such on-going monitoring and the bank has not charged the plan for the work 

and responsibility that such monitoring would entail. Plans, customers and accounts seeking low-cost 

banking and brokerage services, with occasional, non-advisory assistance in scenarios like those 

described above constitute a growing majority of the retirement plans and accounts in existence. 

Classifying this assistance as investment advice would chill this assistance and add costs that would be 

passed on to the plan customer. 

In the Preamble to the Proposed Rule the Department notes that the “regular basis” test creates 

the potential that a service provider offering fundamentally significant investment advice may nonetheless 

evade ERISA’s fiduciary rules by arguing that the advice was not provided on a regular basis. In our 

experience, the regular basis element is not seen by service providers as a shield for providing significant 

advice and at the same time avoiding ERISA’s fiduciary requirements, but rather it is viewed as an 

important and reasonable source of comfort that a service provider’s discrete, non-advisory 

communications with customers will not subject the service provider to unintended obligations and 

prohibitions. 

B. The Proposed Rule would inappropriately create a broader definition of investment

advice under ERISA than the definition applicable under the Advisers Act 

As described above, the Proposed Rule includes two separate prongs that would eliminate the 

Five-Part Test. The first is the prong providing that any party offering advice or recommendations will be a 

fiduciary if the party is an investment adviser within the meaning of the Advisers Act. The second is the 

prong providing that a party will be an ERISA fiduciary if it provides investment advice pursuant to an 

understanding that such advice may be considered in connection with making investment or management 

decisions and will be individualized to the needs of the plan or a plan participant. The language of this 

second prong is similar to the definition of investment advice under the Advisers Act, and, accordingly, it 

would appear at first blush that the definition of investment advice under the Proposed Rule is coextensive 

with the definition under the Advisers Act. However, the authorities under the Advisers Act exempt a 

variety of types of advice from the meaning of investment advice under the Advisers Act. Since the second 

prong of the Proposed Rule does not include any similar exemptions, the Proposed Rule adopts a 

definition of investment advice that is broader than the definition under the Advisers Act. However, even if 
Department of Labor February 3, 2011 pg. 10 

Davis Polk & Wardwell LLP 

the Department’s intent is to adopt a rule that is identical in breadth to the Advisers Act, this would ignore 

the contrasting purposes and regulatory frameworks of ERISA and the Advisers Act. 

Advisers Act ERISA 

The Advisers Act imposes registration, 

disclosure and SEC oversight requirements 

on service providers within its purview, and 

these basic requirements were intended to 

be applied broadly. 

ERISA imposes exacting standards of conduct 

and prohibitions on parties deemed to be 

ERISA fiduciaries, and these standards and 

prohibitions were intended to apply only to a 

limited class of actors playing significant and 

fundamental roles with respect to benefit 

plans. 

The SEC is well-resourced, expert and 

active in keeping abreast of the investment 

market and has issued extensive formal and 

informal guidance for determining the type of 

activities that constitute investment advice 

under the Advisers Act and the rules 

applicable to parties providing investment 

advice. 

Although the Department coordinates with the 

SEC on pertinent regulatory issues, the 

Department is not a financial markets regulator 

and is less active in its rulemaking and its 

provision of informal advice relating to 

investment scenarios, and therefore the 

Department best serves the objectives of 

ERISA and the needs of plans and plan 

service providers by offering regulations which 

establish a clear and circumscribed framework 

for determining the parties who are and are 

not subject to the various rules under ERISA. 

The Advisers Act is focused on registration, 

disclosure and agency oversight of 

investment advisers and, with limited 

exceptions, does not provide for private 

rights of action, but instead allows the SEC 

to apply its expertise and discretion with 

respect to issues under the Advisers Act. 

ERISA’s fiduciary rules impose a complex and 

comprehensive set of requirements and 

prohibitions on fiduciaries and provide a broad 

right of private action, subjecting service 

providers to both legitimate and opportunistic 

litigation attacks, and, accordingly, courts 

should be provided with a clear and 

circumscribed regulation-based framework for 

finding fiduciary status only where the facts 

support this. 

Originally enacted to remedy the gaps caused by a patchwork of state regulation, the broad 

approach adopted by the Advisers Act has, in the ensuing years, required the SEC to continually refine the 

act’s principles through rulemaking and interpretive guidance. As a result, the SEC is an active regulator 

that monitors the behavior of investment advisers through their required disclosures and by concerted 

agency oversight. The Advisers Act contains only limited private rights of action, leaving the SEC to 

address perceived violations with corrective action aimed at enforcing compliance and, where necessary, 

the recovery of losses. The broad definition of investment advice under the Advisers Act and the rules and 

guidance thereunder cast a wide net and subject significantly more advisers to the Advisers Act than the 

Five-Part Test subjects to fiduciary duties under ERISA. This is appropriate as the standards and 

limitations imposed under the Advisers Act are less onerous than those under ERISA, compliance 

questions are reviewed by an expert regulator rather than self-interested plaintiffs, and the consequences 

of inadvertent compliance lapses are generally less severe. 

In contrast, ERISA was enacted not to facilitate state regulation, but to preempt it altogether and 

create nationally uniform regulations for the administration and operation of benefit plans. Toward this end, 
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Davis Polk & Wardwell LLP 

ERISA established exacting standards and a broad and complex framework of rules, prohibitions and 

penalties on parties deemed to be providing investment advice to plans. The resulting fiduciary standards, 

prohibited transactions rules and punitive excise taxes and penalties, and the private right of action created 

under ERISA, dictate that market participants not be unnecessarily caught in the fiduciary regime under 

ERISA. A more definitive and limited definition of investment advice is essential for the purposes of 

ERISA, and if this definition is not provided by the regulation itself, the Department would need to fill the 

void and become an active regulator, a role for which it may be ill-suited. Unlike the SEC, the Department 

is neither active nor expert in providing guidance on financial market matters, and therefore the 

Department best serves the objectives of ERISA and the needs of plans and plan service providers by 

offering regulations which establish a clear and circumscribed framework for determining the parties who 

are and are not subject to the various rules under ERISA. Because ERISA's private right of action subjects 

service providers to both legitimate and opportunistic litigation, courts need to be provided a rules-based 

framework for applying the tests for fiduciary liability established by ERISA. 

The contrasts between the Advisers Act and ERISA affect a wide range of dealings between plans 

and service providers. For example, when financial institutions conduct business with benefit plans they do 

not often have concerns that they might be regarded as investment advisers under the Advisers Act. Their 

conduct typically conforms easily with the exclusions or requirements pertaining to investment advice 

under the Advisers Act. However, they do need to focus carefully on whether the undertaking constitutes 

investment advice under ERISA, as this would impose significantly different requirements. The Advisers 

Act standards are frequently interpreted to permit advisers to address most conflicts of interest by 

disclosure and client waivers, whereas this is not permitted in many situations under ERISA. In addition, 

the Advisers Act often does not prohibit an adviser from providing multiple services with respect to a client, 

whereas this is generally viewed as presenting a conflict under ERISA. More generally, the legislative 

history and the wide body of subsequent judicial and regulatory authority under ERISA make clear that the 

standard of prudence and loyalty imposed on service providers acting as fiduciaries under ERISA are the 

highest known to law. It is difficult to quantify exactly how this standard differs from the “best interest” 

standard under the Advisers Act, but the Department and the courts have consistently recognized a 

heightened standard under ERISA, and the history of rulings and decisions under ERISA certainly exhibits 

an unforgiving standard. 

These standards and limitations under ERISA are absolutely appropriate when applied to the class 

of actors and actions for which they were intended. If the rules under ERISA are altered to include a 

definition of investment advice that is as broad or broader than the definition under the Advisers Act, the 

Department would need to adopt additional rules and exemptions to at least partially restore the historical 

distinction between advice which is subject to scrutiny under the Advisers Act and advice which would 

trigger the more imposing standards and prohibitions of ERISA. Given the distinct purposes of ERISA and 

the Advisers Act, and the resulting differences in the judicial and administrative interpretations that have 

evolved under these two statutes, it would be inappropriate for the Department to adopt by reference the 

rules and interpretations under the Advisers Act. These statutes are not coextensive, and the 

Department’s attempt to establish a rule of convergence after 35 years is not appropriate.

C. The Proposed Rule would impose an inappropriate duty and burden on courts

The Proposed Rule would significantly increase the breadth of discretion afforded to courts in 

determining whether the facts of a case support the conclusion that investment advice has been rendered. 

This is the Department’s primary motive for the rule change, but we believe that the detriments of this 

approach outweigh the intended benefits. 

First, by replacing the Current Rule’s explicit guidelines and its 35-year history of supporting 

interpretations with a broad and vague definition of investment advice will inevitably place courts in the 

position of de facto rulemakers as they will have to intuit the intended contours of the Proposed Rule. This 

is not an appropriate responsibility to impose on courts, and courts have been reluctant to accept this role. 

For example, in Mertens v. Hewitt Assocs. the Supreme Court states that “[t]here is ... a ‘tension between 
Department of Labor February 3, 2011 pg. 12 

Davis Polk & Wardwell LLP 

the primary [ERISA] goal of benefiting employees and the subsidiary goal of containing pension costs’... 

We will not attempt to adjust the balance between those competing goals that the text adopted by 

Congress has struck.”6

Second, while the Department may not be as sophisticated as the SEC with respect to financial 

markets, the Department does possess a unique expertise regarding benefit plans and the general 

services required to operate them. Courts do not necessarily share this level of expertise and should not 

be saddled with a new rule that strips away essential guideposts such as those offered under the Current 

Rule and its history of interpretive authorities. 

Third, the varying interpretations made possible by the ambiguity of the Proposed Rule will result 

in divisions among courts and circuits and a resulting patchwork of conflicting rules. 

Fourth, the broad and vague scope of the Proposed Rule will increase the volume of disputes and 

the caseload burden of the courts. While the breadth and vagueness of the Proposed Rule will inevitably 

attract plaintiffs who seek to inappropriately exploit the rule, even conscientious plan fiduciaries often feel a 

fiduciary duty to test the possibility of recovery of unintended losses where the law presents any angle in 

which the chance of extracting a recovery outweighs the cost of litigation. 

Finally, the net result of all of the foregoing will be market uncertainty. Since the markets usually 

overprice uncertainty, contrary to the Department’s expectation, the Proposed Rule will by definition result 

in costs to plans which outweigh the intended benefits. 

D. The Proposed Rule would classify as ERISA fiduciaries parties who were never intended to be 

regarded as ERISA fiduciaries

1. Scope of the Proposed Rule. Again, we must focus on the core language of the Proposed 

Rule which would classify a service provider as an ERISA fiduciary if the service provider makes 

recommendations as to the value of plan investments or the management of plan assets, in either case 

pursuant to an understanding that the recommendation is individualized to the needs of the plan and may 

be considered in connection with decisions relating to the management of plan assets. This wording is 

apparently intended to achieve the Department’s primary objective of categorizing pension consultants and 

ESOP valuation providers as ERISA fiduciaries. However, the breadth of this wording could potentially 

affect a broad array of service providers that the Proposed Rule was probably not intended to capture. 

2. Parties and scenarios potentially impacted by the Proposed Rule. Described below are a 

number of scenarios involving plan-related service. In the typical case, most of these scenarios are not 

subject to the Advisers Act, based on authorities under that act. These cases are presumably not intended 

to constitute investment advice under the Proposed Rule either. However, whereas the Five-Part Test 

under the existing ERISA fiduciary rules provided a framework for determining when these scenarios might 

cross the line into investment advice, the Proposed Rule offers no similar guidance. 

(a) Certain professionals. The Proposed Rule would include within its scope professionals on 

both the plan sponsor and the plan investment side of a plan’s operations. 

(i) Accountants. Accountants for a plan sponsor might have discussions with the sponsor 

which touch on issues relating to the volatility of plan funding levels, plan contributions and various 

other aspects of plan sponsorship which may bear plan assets and liabilities. On the plan 

investment side, the accountants for various pooled vehicles in which plans invest might issue 

accounting reports which include valuations derived from other sources relating to assets held in 

the pooled vehicle. 

 6

 508 U.S. 248 (1993) (quoting Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 (1981)). 
Department of Labor February 3, 2011 pg. 13 

Davis Polk & Wardwell LLP 

(ii) Actuaries. Plan actuaries might offer the plan sponsor or fiduciary various information 

and opinions regarding the values of plan assets and liabilities, which the sponsor and fiduciary 

might take into account in plan investment and funding decisions. 

(iii) Lawyers. Lawyers for a plan sponsor or fiduciary might offer various information and 

opinions relating to proposed courses of action regarding, for example, the optimal process and 

scope of information to be gathered and considered in making plan decisions. 

(iv) Proxy advisers. Proxy advisory firms may issue recommendations relating to 

shareholder proxies on stock held in a plan’s investment portfolio. Often these recommendations 

are not intended to be tailored to the interests of any particular investor, but they may be provided 

to specific investors who subscribe to the proxy adviser’s services. 

It is not entirely clear when, if ever, the above situations would be deemed to involve 

investment advice under the Proposed Rule. 

(b) Valuation providers. It is also not entirely clear when valuations relating to both plan 

investments and investments held in non-plan asset vehicles are intended to fall within the definition of 

investment advice under the Proposed Rule. 

(i) General valuation providers. There are numerous scenarios in which parties gather 

and use valuations relating to an ERISA plan’s investments. These valuations are often 

individualized to the plan in the sense that they relate directly to an asset held by the plan, and the 

values may be considered by the plan, for example, for purposes of maintaining a desired asset 

allocation. These scenarios include situations in which prices from various quotation systems or 

industry pricing feeds are reported out to third parties by equity prime brokers, pooled investment 

fund administrators or valuation firms. Such prices may, in turn, be used by the third parties to 

assess the value of their portfolios and report out the value of interests in these portfolios to 

investors, including benefit plan investors. The sources providing these values are often not in 

direct privity with benefit plan representatives and provide the same valuations to all end users, 

benefit plans as well as the broader market of investors. These valuation providers are neither 

seeking nor expected to act as fiduciaries or agents of the consumers of their valuations, rather 

they are, by definition, independent and unbiased processors and evaluators of pricing 

information. It is neither practical nor appropriate that these service providers should be treated as 

ERISA fiduciaries merely because benefit plan investors might use their valuations for their own 

purposes. 

(ii) Non-plan asset vehicles. Non-plan asset investment vehicles take a variety of forms, 

including: registered investment companies; investment funds in which benefit plan investors hold 

less than 25% of each class of equity interests; venture capital operating companies (“VCOCs”); 

and real estate operating companies. Each of these types of vehicles may hold investments of 

varying liquidity, may value these assets using a variety of sources and methods and may use 

those values to report positions to investors or compute a value for investors’ interests in the 

vehicle. It is not clear when, if ever, a vehicle manager or other party preparing, reporting or using 

these values would be deemed to be providing investment advice to an investing plan under the 

Proposed Rule. Under existing ERISA rules a manager of a registered investment company 

would not be regarded as an ERISA fiduciary with respect to an investing plan when the manager 

buys and sells portfolio assets of the investment fund, and it would be incongruous if the manager 

or its service providers would become ERISA fiduciaries when they value fund portfolio investment 

and thereby establish the value of fund shares held by benefit plan investors. Similarly, managers 

of VCOCs may value portfolio investments, explicitly or implicitly, when they buy these 

investments and draw down committed capital from their participating investors and when they sell 

these investments. It has never been suggested that VCOC managers were ERISA fiduciaries 

with respect to these valuations. It would be odd if these managers (or their accountants) were 
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Davis Polk & Wardwell LLP 

deemed to be ERISA fiduciaries when, for example, they reported values for these same portfolio 

investments to their accountants and those values were used in fund financial statements provided 

to ERISA and non-ERISA investors in the VCOC. 

(iii) Plan asset vehicles. Plan asset vehicles can also take a variety of forms, including 

insurance company accounts, collective investment trusts and private investment funds which do 

not qualify for an exception under the ERISA plan asset rules. Managers of these vehicles are 

fiduciaries with respect to the plan assets held within the vehicles and are required to operate in 

accordance with applicable ERISA rules and guidance. However, like most managers, the 

managers of these vehicles receive pricing and valuation information for their portfolio investments 

from a wide variety of sources. It is unclear from the Proposed Rule which, if any, of these 

sources are intended to be viewed as providing investment advice. 

Presumably, the provision or use of valuations with respect to investments of a non-plan asset 

vehicles would not trigger an investment advice analysis under the Proposed Rule because superseding 

concepts under ERISA provide a broad exemption for non-plan asset vehicles. In addition, the provision of 

valuation information by a third party to a manager of a plan asset vehicle should not make the third party 

an investment adviser where the relevant pricing and valuation services are objective and independent and 

are not individualized to any particular investor. However, the Proposed Rule fails to provide clarity on 

these and other valuation scenarios, some of which will undoubtedly raise thornier questions. 

E. The Proposed Rule would create confusion and uncertainty at a time when other 

significant legislative and regulatory priorities are being addressed

1. Background. As demonstrated in the discussion and examples in various portions of this letter, 

the Proposed Rule would likely have significant impact on service providers that are registered under 

federal securities laws as broker-dealers, investment advisers or both. The legal and self-regulatory 

regimes governing these service providers are currently in a critical stage of evolution. 

(a) Business conduct standards applicable to registered broker-dealers. Under the “shingle 

theory,” broker-dealers have traditionally been subject to a standard of fair dealing with respect to 

recommendations made to customers. The essence of this standard is embodied in the suitability rule 

under NASD Conduct Rule 2310, which requires that a broker-dealer making a recommendation to a 

customer “have reasonable grounds for believing that recommendation is suitable for the customer upon 

the basis of the facts, if any, disclosed by such customer as to his/her financial situation and needs.” 

Generally, the broker-dealer would have reasonable grounds to believe that a recommendation is suitable 

for a customer if the broker-dealer has made an informed determination that the recommended course of 

action is suitable for at least some investors’ needs, as opposed to the specific investor’s needs. If the 

customer has total assets under $50 million and is not an institutional customer (e.g., a bank, investment 

adviser, investment company), the broker-dealer is required to obtain information indicating the customer’s 

financial status, tax status and investment objectives and such other information considered to be 

reasonable by the broker-dealer in making the recommendation. 

(b) Business conduct standards applicable to registered investment advisers. Investment advisers 

are typically subject to a “best interest” standard with respect to their recommendations and actions 

affecting advisory clients. This standard includes a duty of prudence to ensure that investment advice is 

suitable for the clients’ objectives, needs and circumstances and a duty of loyalty to eliminate, or at least 

expose, all conflicts of interest and specifically refrain from personal transactions that can cause harm to a 

client’s interests. 

(c) Business conduct standards applicable to swap dealers. Historically, swap dealers have not 

been subject to a centralized conduct of business regime similar to the regimes applicable to SEC 

registered securities brokers and investment advisers. 
Department of Labor February 3, 2011 pg. 15 

Davis Polk & Wardwell LLP 

2. Dodd-Frank Act. 

(a) The Act. In the wake of the recent financial crisis, Congress undertook a sweeping initiative to 

review the standards of conduct applicable to broker-dealers, investment advisers, swap dealers and other 

significant participants in swap transactions. These measures, which were codified in the Dodd-Frank Wall 

Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), were a first-line order of 

priority for Congress and financial market regulators and will generate a complex set of new and farreaching regulations governing the course of dealings between investors and their service providers in 

financial markets. 

Many had pushed for the Dodd-Frank Act to include specific statutory provisions that would have 

imposed new standards of conduct on broker-dealers in their dealings with ordinary brokerage customers, 

as well as provisions that could have subjected swap dealers to ERISA’s fiduciary standards in their 

dealings with plan counterparties. Both of these initiatives were debated and ultimately rejected by 

Congress. Given the importance and complexity of financial markets, Congress recognized a need for 

more expert and deliberate review of the standards of conduct that should apply in the various transactions 

and relationships between service providers and their customers and counterparties. Accordingly, among 

the initiatives included in the Dodd-Frank Act: 

• Section 913 of the Dodd-Frank Act required the SEC to prepare a study of the 

standards of conduct applicable to broker-dealers and investment advisers and 

determine whether changes were necessary; and 

• Section 713 of the Dodd-Frank Act amends the Commodities Exchange Act 

(“CEA”) to authorize the Commodities and Futures Trading Commission (“CFTC”), 

in coordination with the SEC, to establish appropriate standards of business 

conduct for swap dealers and major swap participants when they undertake to act 

as advisers to certain counterparties in swap transactions. 

(b) The SEC’s Dodd-Frank study and its recommendation for standards of care applicable to 

investment advisers and broker-dealers. The SEC staff completed its study of broker-dealers and 

investment advisers, and this study recommends that rules be adopted under the Securities Exchange Act 

of 1934 to establish a uniform standard of care for broker-dealers and investment advisers when providing 

securities-related investment advice to retail customers, no less stringent than the “best interest” standard 

currently applicable to registered investment advisers. The study also recommends uniform standards 

relating to personnel supervision, advertising, the use of finders and solicitors, and licensing, registration 

and recordkeeping. 

(c) Business conduct initiatives for swap dealers and major swap participants under Dodd-Frank 

and the related CFTC proposal. The Dodd-Frank Act imposes requirements on swap dealers and major 

swap participants (“SD/MSP”) when they engage in swap transactions with special entities. Special 

entities include ERISA plans. CFTC proposals indicate that special entities should also include plan asset 

vehicles through which ERISA plans might invest, but the CFTC has requested comments on this point. 

Among other things, before engaging in a transaction with a benefit plan investor a SD/MSP would 

be required to have reasonable basis to believe that a benefit plan investor is represented in the 

transaction by an adviser who is qualified and independent from the SD/MSP. Under current CFTC 

proposals, if an adviser to a benefit plan investor received any compensation from a SD/MSP within one 

year prior to negotiating a swap transaction with the SD/MSP, the benefit plan investor would need to be 

informed and provide a written consent that the adviser may act for the benefit plan investor in the 

transaction. This independence standard would be more strict than the standard applied under the ERISA 

guidance that applies to most swap transactions (i.e., the Department’s class exemption for transactions by 

qualified professional asset managers (PTCE 84-14)). 
Department of Labor February 3, 2011 pg. 16 

Davis Polk & Wardwell LLP 

Separately, under the Dodd-Frank Act and recently proposed CFTC rules, if a SD/MSP acts as an 

adviser to a benefit plan investor in a covered transaction, the SD/MSP must act in the best interest of the 

benefit plan investor. The Dodd-Frank Act and proposed CFTC rules do not specify what is required of a 

SD/MSP to show that it acted in the “best interest” of the counterparty. The relevant CFTC release refers 

to established principles in case law under the CEA, Advisers Act and ERISA, but the release also states 

that the Department has advised the CFTC that the determination of the status of a SD/MSP under the 

CFTC rules is separate and distinct from the determination of whether the SD/MSP is an ERISA fiduciary. 

Swap dealers have expressed concern that by seeking to meet the requirements of the CFTC’s 

proposed rules, a swap dealer will be required to provide information and assistance to benefit plan 

counterparties which could be regarded as advice or recommendations for purposes of ERISA rules and 

thereby cause swap dealers to be regarded as ERISA fiduciaries with respect to their benefit plan 

counterparties. This would create an untenable circular trap, because under ERISA a fiduciary is typically 

presumed to be prohibited from engaging in trades in which it has acted as a fiduciary to the benefit plan 

investor. This was clearly not the intent of the Dodd-Frank Act. In fact, this result was considered and 

rejected by Congress when it adopted the Dodd-Frank Act. While the Department’s comments to the 

CFTC seem to imply that the Department understands this and does not intend that the information and 

assistance that swap dealers must provide to plan counterparties under the Dodd-Frank Act should cause 

swap dealers to be regarded as ERISA fiduciaries, the Department’s Proposed Rule clouds this conclusion 

by significantly broadening the category of information and advice that could cause a swap dealer to 

become an ERISA fiduciary. 

3. Impact of the Department’s Proposed Rule in view of competing regulatory priorities. There is 

bound to be debate and confusion over the provisions of the Dodd-Frank Act and the flurry of related 

rulemaking by the SEC and CFTC. While a full analysis of the competing views in this area is beyond the 

scope of this comment, there are two related points of relevance here. 

First, if any enhanced standards of care or loyalty are to be imposed on the dealings of brokers 

and dealers, these standards should be determined by the SEC and CFTC. Whether a broker-dealer 

should be subject to additional standards of care when dealing with a benefit plan counterparty and how 

those standards should be determined were topics that were debated and settled by Congress when it 

enacted the Dodd-Frank Act, and these provisions are being effectuated by appropriate SEC and CFTC 

rulemaking. Given Congress’ recent consideration and resolution of this very topic under the Dodd-Frank 

Act and its provision for prescribed regulatory action in this area by the SEC and CFTC, it would be 

inappropriate for the Department to adopt rules that would impinge on the regulatory framework envisaged 

by the Dodd-Frank Act. 

Second, if, despite the foregoing, the Department continues to believe that an ERISA rule change 

is appropriate, this rule change should be deferred until after the rules of the SEC and CFTC under the 

Dodd-Frank Act are finalized and their impact is absorbed by the relevant regulators and market 

participants. The transformative measures under the Dodd-Frank Act have been a consuming priority for 

Congress, financial market regulators, self-regulatory bodies and market participants. Market participants 

will continue expend substantial efforts and incur significant burdens absorbing these changes and their 

resulting ripple effects. Even if the Department concludes that the Dodd-Frank Act’s refusal to expand the 

scope of conduct subject to the ERISA fiduciary standards does not preclude the Department from 

reopening this issue, the Department should at least wait until the express priorities under the Dodd-Frank 

Act have been finalized and absorbed by the market. 
Department of Labor February 3, 2011 pg. 17 

Davis Polk & Wardwell LLP 

Part III: The Proposed Exception for Adverse Parties

The Proposed Rule provides that a party will not be considered to be providing investment advice if 

it can demonstrate that the recipient of the advice knows or, under the circumstances, reasonably should 

know, that the party is providing the advice in its capacity as a purchaser or seller of a security or other 

property, or as an agent of, or appraiser for, such a purchaser or seller, whose interests are adverse to the 

interests of the plan or its participants or beneficiaries, and that the person is not undertaking to provide 

impartial investment advice (the “Transaction Exception”). 

The Transaction Exception is sensible and is consistent with the traditional view of brokers and 

counterparties in various transactional settings. For example, as acknowledged in the SEC staff’s recent 

study on investment advisers and broker-dealers, securities brokers commonly give a certain amount of 

advice to their customers in the course of their regular business, and the Advisers Act excludes from its 

definition of investment adviser brokers whose investment advisory services are performed incidental to 

their business as brokers and without added compensation. 

The Transaction Exception is also consistent with the general trend of regulation applicable to 

financial markets. As noted, the proposals being suggested for securities brokers and swap dealers by the 

SEC and CFTC contemplate that such parties may provide advice to an investor with respect to a 

transaction and simultaneously act as a counterparty or agent for a counterparty in the transaction. 

Moreover, the Transaction Exception may be necessary based on the direction that these other proposed 

regulations seem to be taking. For example, if the CFTC conduct of business rules for SD/MSPs ultimately 

require an SD/MSP to provide certain specified of information to benefit plan counterparties (such as daily 

marks, as is currently proposed by the CFTC), the ERISA fiduciary rules may need to include an exception 

making clear that the SD/MSP does not become an ERISA fiduciary by virtue of meeting its obligations 

under the CFTC rules, otherwise the SD/MSP may be preempted from even trading with benefit plan 

investors by virtue of ERISA’s prohibited transaction rules. 

However, the Department’s inclusion of the Transaction Exception under Proposed Rule at this 

juncture demonstrates the fundamental regulatory shift inherent in the Proposed Rule. The regulatory 

trend which we noted above with respect to securities brokers and SD/MSPs merely recognizes that 

brokers and SD/MSPs have traditionally provided certain types of advice to customers and counterparties, 

and, accordingly, the rules being proposed by the SEC and CFTC simply attempt to impose standards with 

respect to this advice (or at least this was the original intent of the Dodd-Frank Act). The Department’s 

Proposed Rule works in the opposite direction. It declares as investment advice a broad range of conduct 

that has never been viewed as advice under ERISA and then it exempts from existing fiduciary 

requirements any party who provides advice in the context of a self-interested transaction. In other words, 

because of the overbroad scope of the Proposed Rule’s new definition of advice, the Proposed Rule must 

offer a broad exemption. 

This is a curious and unprecedented approach for the Department. Historically, parties seeking to 

offer investments to a plan have been careful to ensure that they do not create any misunderstanding that 

they are providing advice to the plan. This would violate basic loyalty principles as well as applicable 

prohibited transaction rules. In our experience, and indeed pursuant to our advice, financial parties do not 

typically assume they can provide any level of advice (in the traditional sense of the word) to a plan 

counterparty and be sure that the plan understands that this advice is not necessarily intended to take full 

account of the plans needs, objectives and risk tolerance and may not be the same level of advice that a 

plan fiduciary might provide. While disclosures and acknowledgments may be used by financial parties in 

an attempt to make clear to a plan that the financial party is not undertaking a fiduciary role in a 

transaction, financial parties do not necessarily rely on these disclosures and acknowledgments. Instead, 

financial parties generally limit their conduct and communications in a manner that clearly avoids an 

advisory role. This is true in transactions involving large defined benefit plans, and it is true with respect to 

retail services provided to small defined contribution plans and IRAs. For example, banks and brokerage 
Department of Labor February 3, 2011 pg. 18 

Davis Polk & Wardwell LLP 

firms typically offer the choice of two distinct platforms to defined contribution plans and IRAs – brokerage 

or advisory. These firms circumscribe their interaction with customers choosing the brokerage platform not 

only because customers are not the interested in paying for investment advice and the firm is not being 

compensated for the obligation and risk of providing this advice, but also because the provision of advice 

would preclude the firm’s reliance on critical prohibited transaction exemptions. 

While we believe that the Transaction Exception under the Proposed Rule is practical and may 

eventually be essential if the SEC and CFTC initiatives are adopted as proposed, the SEC and CFTC 

proposals have not been finalized, and, therefore, the Transaction Exception under the Proposed Rule is 

responsive, not to the SEC and CFTC proposals, but to an anomaly that would be created by the breadth 

of the Proposed Rule itself. This demonstrates the fundamental realignment posed by the Proposed Rule. 

Indeed, the Department’s inclusion of the Transaction Exception in the Proposed Rule is the most concrete 

evidence that the Department appreciates the potential impact that the Proposed Rule would have on 

parties who provide services to plans. 

Part IV. The Department’s Concerns Driving the Proposed Rule

In light of the concerns identified above, we would suggest that the better approach would be for 

the Department to consider specific rules that provide workable guidance on the principal concern the 

Department is attempting to address – the opportunity for abuse by ESOP appraisers and pension plan 

consultants. 

A. ESOP appraisals

With respect to ESOP appraisals: 

• The Department could adopt specific guidelines providing clear standards for ESOP 

appraisers. 

• The Department could also adopt guidelines for other fiduciaries in the ESOP context 

(e.g., ESOP trustees), requiring them to critically analyze and evaluate valuation reports. 

• The Department could require ESOP appraisers to be credentialed by a professional 

organization which imposes a professional code of conduct on appraisers and periodic 

professional training requirements. 

• The Department could require ESOP sponsors to notify the Department in advance of 

private sales of stock to an ESOP and permit the Department to conduct a valuation audit 

as precondition to the transaction. 

B. Pension plan consultants

In the Preamble to the Proposed Rule, the Department expressed specific concerns regarding 

pension consultants who have allegedly failed to disclose conflicts of interest to their pension plan clients. 

The Department cited the GOA and SEC studies in support of its view that such undisclosed conflicts of 

interest translated into lower returns for client plans. 

As a result of the well-publicized reviews of pension consultants by the Department, the SEC and 

the GAO, it appears that both pension consultants and consumers have already been educated about best 

practices and have developed policies to police their conduct. Moreover, the Department recently released 

interim final rules under ERISA Section 408(b)(2) will require detailed disclosures by pension consultants 

commencing in July 2011. Accordingly, we would suggest that the next step should be a review by the 

Department to determine if there continues to be any potential for abuse that is not sufficiently remedied by 
Department of Labor February 3, 2011 pg. 19 

Davis Polk & Wardwell LLP 

the Section 408(b)(2) regulations. This would enable the Department to determine whether rulemaking is 

necessary and, if so, how that rulemaking can be tailored to most effectively address the current practices. 

Part V: Critical Changes That Would Be Necessary If the Proposed Rule Is Adopted

For the reasons discussed above, we would encourage the Department to withdraw the proposed 

Rule. If the Department decides to move forward, we believe that the Proposed Rule should be subject to 

a more rigorous study by the Department and should be delayed until the ongoing priorities under the 

Dodd-Frank Act are completed and the Department and market participants have had sufficient time to 

analyze the manner in which the Department’s initiative can be coordinated with the new rules under the 

Dodd-Frank Act. 

If the Department ultimately chooses to work with the Proposed Rule in its current form, a number 

of modifications and ancillary measures would be required, including the following: 

• Delete the provision of the Proposed Rule which defines investment advice by reference 

to the Advisers Act. 

• Provide guidance on the meaning of the terms “advice,” “recommendations” and 

“individualized” for the purpose of the Proposed Rule. Given the vagueness that would 

be introduced by deletion of the Five-Part Test, guidance on the intended meanings of 

these terms is essential. 

• Exclude from the definition of “investment advice” services provided by parties not 

intended to be investment fiduciaries under ERISA, including accountants, actuaries, 

lawyers, information providers and valuation firms not acting as agents of plans. 

• Expand the Transaction Exception under the Proposed Rule to cover (i) the sale of 

services and information and extensions of credit; (ii) sales and purchases by or through 

intermediaries other than agents of the seller/purchaser where, by definition, the 

intermediary has a potential misalignment of interest (e.g., brokerage and agency 

transactions); and (iii) situations involving arrangements other than sales (e.g., the 

provision of property, information or services without charge in connection with 

promotions or as an adjunct to a transactional relationship). 

• Revise the Proposed Rule to (i) make clear that a party will not be deemed to be an 

ERISA fiduciary as a result of providing information, advice or recommendations to a plan 

representative who meets established criteria of sophistication under ERISA authorities 

(e.g., QPAMs) and (ii) permit a fairer basis for determining whether an investment 

advisory scenario exists when a non-advisory service provider offers incidental advice or 

recommendations to a plan customer or provides assistance to a sophisticated plan 

representative (e.g., a named fiduciary or trustee of a plan with assets in excess of 

$50M). 

• Conduct a further study as to whether investment advice should include 

recommendations relating to the manner and timing of plan distributions. This aspect of 

the Proposed Rule has precipitated legitimate debate and warrants further study. 

• Prepare a study of the impact of the Proposed Rule on the existing framework of ERISA 

exemptions covering plan transactions, and propose for public comment appropriate 

clarifying guidance and exemptions prior to the effective date of the Proposed Rule. 

* * * 
Department of Labor February 3, 2011 pg. 20 

Davis Polk & Wardwell LLP 

We appreciate the opportunity to participate in this process and would be pleased to discuss our 

comments or any questions the Department may have with respect to this letter. Any questions about this 

letter may be directed to Edmond T. FitzGerald or Erin K. Cho at 212-450-4000. 

 Respectfully submitted, 

 DAVIS POLK & WARDWELL LLP